• July 28, 2010

At the risk of alienating Minnesota Litigator readers with one of dullest posts ever, a published Minnesota Court of Appeals decision has come down this week on the interplay between Article III of the Uniform Commercial Code, on the one hand, “principles of law and equity” on the other hand, and determining when the former “displaces” the latter.  The issue may be dull until the distinction means the difference between recovering money on a promissory note and recovering nothing.  Then maybe it gets interesting…

Lester Nordin lent his daughter and son-in-law money (about $38,000, at 7% interest, with no due date on the loan), the debt secured by a promissory note in 1997.  Then, a year later, the borrowing couple divorced.  Then, a year later, it seems Lester’s wife died and he married Edna, his ex-son-in-law’s mother.  Then, in 2003, Edna made a $10,000 payment on her son’s debt. Then, in 2008, Lester Nordin died and Susan Nordin, as his personal representative sought to get repayment on the note from Roland Retzlaff, her ex-husband.

The issue:  did the applicable statute of limitation on Retzlaff’s debt to Lester Nordin, 10 years, lapse since the date of the promissory note executed in 1997 or did the payment by Edna, on her son’s behalf but without his knowledge or approval, toll the statute of limitation?

Minn. Stat. § 336.3-602(a) (2008) provides that “an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument, and to a person entitled to enforce the instrument.”  Based on this law, the district court held that Edna’s payment was a payment on the note under Article III and, consequently, tolled the ten year statute of limitations.  To the extent that common law provides that tolling would have required Retlaff to have had knowledge of and to have ratified the payment of the debt on his behalf, the trial court (Grant County District Court) ruled the law was displaced by the UCC.

The Minnesota Court of Appeals (Schellhas, Connolly, Willis) in an opinion by Judge Schellhas reversed.

Because section 336.3-602(a) provides only that an instrument is paid to the extent payment is made by or on behalf of a party obliged to pay the instrument,  but does not state how to determine when such a payment is made, section 336.3-602(a) does not displace principles of law and equity.

Under the common law, Edna’s payment did not qualify as a payment on the debt by her son because payment was not only not made by him, but also without his knowledge or ratification (even if on his behalf).  Plaintiff had argued that the focus in the law was not on the borrower’s intent to repay the debt but, rather, on the lender’s intent to seek repayment.  The Court of Appeals rejected that case law as preceding “well before” the 1992 10-year statute of limitation on such claims.

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